CHAPTER 3

What Causes Financial Crashes

And the Implications for Financial Regulation

Financial crashes ought to be occasions of great learning and introspection. Crashes occur as a result of being largely unanticipated. Those who had warned of an unsustainable boom had long before been ridiculed or beaten into submission.1 However, crises appear to be such multifaceted and complex affairs that all and sundry can point to an aspect of the crisis they had predicted. Positions can become entrenched rather than open to reassessment. Authority figures who had dismissed the warning signs characterize the root causes as unknowable and suggest the crisis merits fundamental changes to our understanding of economics, institutional arrangements, and legal ...

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